Economic Survey of Chile 2010: Need for speed: boosting productivity growth by strengthening competition, entrepreneurship and innovation

 

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The following OECD assessment and recommendations summarise chapter 3 of the Economic Survey of Chile published on 27 January 2010.

 

Contents

 

Chile needs to enhance productivity growth

Lagging labour productivity explains the major part of the per capita income gap with OECD countries, while weak labour utilisation due to low participation of females and youths explains a smaller part. The apparent stagnation of productivity over the past decade accounts for most of the slowdown in GDP growth. Although macroeconomic management has improved markedly over the past two decades, a number of weaknesses in structural policies have contributed to the uneven productivity performance: product market competition, as measured by price cost margins, remains weak by OECD standards. Further, regulations on entry and exit discourage entrepreneurial risk taking and the diversification into new and higher productivity activities. Although recent reforms of the innovation policy framework aim at broadening the focus of innovation policy from basic public research to all forms of innovation, technological and non technological innovation in firms remains low.


Anti-cartel reform is welcome, but there is room to go further

A recent reform of competition policy increases the investigative powers of the National Economic Prosecutor, introduces a leniency programme and increases the level of fines for cartel infringement. The well-designed reform must now be implemented effectively. The National Economic Prosecutor should receive sufficient resources to cope with a likely increase in caseload, and deterrence for cartel participation would be strengthened by making price-fixing a criminal offence, as planned by the government. Competition in product markets would be enhanced by more price transparency from more effective consumer protection, and by further strengthening the enforcement of competition law, in particular in the area of cartels. The current maximum fine remains too low to deter large corporations and risks undermining the effectiveness of the leniency programme, as immunity becomes more attractive the higher the fine. The authorities should therefore consider linking the maximum fine to sales on the relevant market. The effectiveness of the leniency programme will also depend on legal certainty for potential applicants. The publication of a preliminary guideline on the conditions under which the National Economic Prosecutor will grant immunity is therefore a welcome measure and the final guideline should spell out these conditions as precisely as possible.


Regulation on start-ups and the bankruptcy laws need to be improved to foster entrepreneurship

OECD indicators show that administrative burdens on start ups are higher than in most OECD countries. Chilean entrepreneurs face more procedures, longer delays and higher costs when starting a business. Entry regulations in specific services sectors, such as registration and notification requirements in retail and exclusive rights in professional services, also appear to be more restrictive than in most OECD countries. Chile has recently passed a law to reduce red tape for small and medium-size enterprises. To enhance entrepreneurship, Chile should further reduce administrative burdens on start ups and facilitate entry into specific services sectors.


The bankruptcy procedure is inefficient, which not only slows the exit of low-productivity firms but also holds back entrepreneurial risk taking and makes access to credit difficult. According to the World Bank Doing Business indicators, Chile’s bankruptcy procedure is lengthier and more costly than in most OECD countries. Moreover, the protection of creditors during bankruptcy appears to be weak. As creditors anticipate low recovery rates, they can become reluctant to give credit to potentially very productive but risky businesses. Several initiatives to make the bankruptcy law more efficient are under way and, in particular, the government enacted a law that simplifies bankruptcy procedures for small and medium-size enterprises. The authorities have also launched an inter ministerial working group to assess options for reform, among others the creation of specialised bankruptcy courts. Efforts to improve the bankruptcy procedure should be continued to facilitate the exit of inefficient firms and encourage entrepreneurial risk taking in innovative sectors.


Efforts to broaden innovation policy beyond basic research should be continued

Until recently, the innovation policy framework focused on basic research in public institutes and universities. As a consequence, the private business sector’s propensity to engage in technological (product or process) and non technological (marketing or organisational) innovation is low by OECD standards. The authorities have taken several measures to improve industry-science relationships to make scientific research more market relevant. Among other measures, they introduced an R&D tax credit that requires the participation of research institutes external to the firm, and they strengthened funding mechanisms that require matching public grants with funds from private businesses. The authorities have also started to move away from a narrow focus on R&D to support all forms of technological and non-technological innovation, among others by broadening the support programmes of the economic development agency. Efforts to strengthen links between firms and universities and support all forms of technological and non-technological innovation in firms should be continued.


Cluster strategies should remain based on market-like mechanisms and potential risks should not be overlooked

Most OECD countries encourage the formation of industrial clusters, which may be justified on economic grounds if there are positive externalities for the economy at large. In Chile, the formation of industrial clusters may foster the diversification into non-traditional high-productivity sectors, but potential risks to public resources should not be overlooked. To avoid spending public resources without any inducement effect or on sectors that turn out to be failures, clear performance objectives should be specified. For clusters that meet their performance objectives, the need for continued public support should be reviewed periodically (sunset clauses), as the objective should be that private financing eventually replaces public support. For clusters that continually fail to meet their performance objectives, support should be withdrawn early to avoid the lock-in of failures. The authorities have started to specify the clusters’ outcome targets in terms of exports, which should now be complemented by transparent protocols on the conditions under which public support will be withdrawn.

 

 

How to obtain this publication

The complete edition of the Economic Survey of Chile is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations. 

 

Additional information

For further information please contact the Chile Desk at the OECD Economics Department at eco.survey@oecd.org.

The OECD Secretariat's report was prepared by Nicola Brandt, Cyrille Schwellnus and Rodrigo Paillacar under the supervision of  Patrick Lenain.   Research assistance was provided by Roselyne Jamin, Jehan Sauvage and Valéry Dugain.

 

 

 

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